Milton Friedman, and the Total Discredit of 'Corporate Social Responsibility'
“There is one and only one social responsibility of business—to use its resources and engage in activities designed to improve its profits so long as it stays within the rules of the game, which is to say, engages in open and free competition, without deception and fraud.”—Milton Friedman
A wise man once said, “No one did more than Adam Smith to make capitalism and self-interest respectable.” Except, perhaps, Milton Friedman. While it is true that no economist can rival the reputation of Adam Smith as a founder of the discipline, Friedman was its undisputed champion. To paraphrase Richard Posner, Friedman combined three distinct roles—analyst, advocate, and public intellectual—in enormously successful fashion.
Friedman’s fame stemmed from a strong central argument: Using a variation of the Coase Theorem, he argued that positive economic theory and empirical analysis “led to the scientific conclusion that the government should not enter into the market.” Therein lies the intellectual underpinning of Friedman’s view on Corporate Social Responsibility (CSR). Of course, Friedman’s statement does not reflect the current climate of opinion—nor did it ever. In the original article, Friedman criticized “the present climate of opinion, with its wide spread aversion to ‘capitalism,’ ‘profits,’ the ‘soulless corporation’ and so on…” In sum, the business world was, and remains, mired in a hostile climate of opinion.
Empirically speaking, the market has moved against Friedman’s philosophy. The largest firms in America and Britain spend more than $15 billion a year on CSR, and new research suggests this spending may create monetary value for companies. As The Economist concludes, “even if you accept Friedman’s premise and regard CSR policies as a waste of shareholders’ money, things may not be absolutely clear-cut.” Indeed, they may not be, but not for the aforementioned reasons. In the current environment, it may be rational for companies to adopt CSR policies in order to contend with regulatory and competitive pressure; however, this says little about the inherent value of the policies themselves, or the principles behind them. In fact, a cynic might point to the increase in CSR spending as an indicator of reverse regulatory capture, or merely as an exercise in public relations.
Friedman himself said the “first step toward clarity in examining the doctrine of the social responsibility of business is to ask precisely what it implies for whom.” The same could be said for Friedman’s own doctrine, which deserves clarification. In the Harvard Business Review, Justin Fox examines Friedman’s famous claim that the sole responsibility of a business is to increase its profits. While noting its elegance and simplicity, Fox concludes that Friedman’s rule, “isn’t nearly as simple as it sounds.” First, the “rules of the game” aren’t always impartial. Second, the rules of the game also incorporate social norms that go beyond government requirements. Third, and most important, “the commandment to increase profits is not nearly as straightforward as it might seem.”
Overall, Friedman’s detractors and supporters alike would benefit from digging deeper into the apparent contradiction between corporations pursuing profit and social responsibility. Economics is all about trade-offs, and as Roger Martin has argued:
“An economist falls apart and turns into a blubbing puddle on the floor if you take away the concept of trade-offs because they all started in the same place…Trade-offs are a sacred article of faith for economists. You simply can’t be an economist if you don’t consider trade-offs to be a central feature of your worldview.”
Unsurprisingly, Friedman understood the terms of this trade-off better than most. In fact, he argued the “doctrine of ‘social responsibility’ involves the acceptance of the socialist view that political mechanisms, not market mechanisms, are the appropriate way to determine the allocation of scarce resources.” To be clear, the argument hinges on a disagreement over means, not ends. The end goal is the same: a civilized society. The means of getting there, however, are antithetical.
In terms of social benefit, I share Friedman and Smith's skepticism about the benefits that can be expected from "those who affected to trade for the public good." The reason is twofold. First, imposing ill-defined “Corporate Social Responsibilities” on firm managers is inefficient and unreliable. Second, pursuing profit maximization will induce a firm to internalize costs within an established legal framework. In short, the market mechanism works better than the political in terms of outcomes and incentives.
Trade-offs are inevitable, but that does not mean shareholder value and social benefit are mutually exclusive concepts. On the contrary, pursuing profits is often a good route to a civil and civilized society. Shareholder interests should supersede other concerns, but only within an established framework of formal rules. Adam Smith himself stressed “the importance of formal rules and social norms; and the potential of the invisible hand to lead individuals pursuing their self-interest in commercial settings to behave in socially beneficial ways.” Indeed, the central point of agreement between Adam Smith and Milton Friedman is self-interest, and its ability to generate a complex but unintended social order that aligns individual and general interests.
This essay began with an observation about Adam Smith. Namely, that he made capitalism and self-interest respectable. While important and true, Adam Smith did much more than that. In fact, his writings “asked and attempted to answer the most important questions of not only his times but all times: How can we live together peacefully and prosperously?” In discussing corporate social responsibility, Milton Friedman attempted—and succeeded—in the same endeavor. Friedman’s work in general, and his emphasis on pursuing profits in particular, showed how we can live together peacefully and prosperously. He exposed the difficulty of exercising “social responsibility” via political mechanisms, and championed the market’s ability to create value for the shareholder and society alike. True to the tradition of Adam Smith, Friedman found answers to the most important questions of his time—and ours.